A common question that business owners raise involves the use of employees versus independent contractors. The use and classification of an individual as an employee or independent contractor is one of the more complicated employment law issues that business owners will deal with and resolving such issues will depend upon circumstances.
Consider one test, the economic reality test, is used for determining employment status when it comes to social legislation such as worker’s disability compensation. However, another test, the “control test,” is used when it comes to tort actions. And both of these tests have multi-faceted factors that need to be considered under the specific circumstances).
But a recent Michigan Court of Appeals decision (Cole v. The Bada Bing Club, 2014) involving an employee/independent contractor issue drills home the point (quite literally) one of the significant differences between the two statuses and why it matters to employers.
The Beating at the Bada Bing Club
Specifically, Dennis Cole was severely beaten in the basement of the Bada Bing Club by the club’s manager, Henry Ramirez and three other individuals. The following is taken directly from the Court of Appeals opinion:
Plaintiff was taped to a chair, beaten with a gun, punched and kicked, and drilled through the hand with an electric drill. The men were all convicted of criminal charges for their involvement.
Plaintiff sued the Bada Bing Club and Atlantis Lounge Inc. Atlantis Lounge was the sole Owner of the Bada Bing Club, which was an assumed name filed by Atlantis. Atlantis Lounge, however, verbally contracted with Henry Ramirez (the guy involved in beating Plaintiff) who solely managed and operated the Bada Bing Club.
Lawsuit Turns on Employee or Independent Contractor Status
A central issue on appeal was whether Ramirez was an employee or an independent contractor. If Ramirez was an employee of Atlantis Lounge, then Atlantis could be held directly liable for negligently hiring, training, or supervising Ramirez. In contrast, under Michigan law there is no comparable cause of action for the negligent hiring or retention of an independent contractor. In other words, if Ramirez was an independent contractor then Atlantis Lounge was off the hook.
Normally a court will look to the employment/independent contractor agreement as a starting point for determining the true status of the individual. However in this case, there was an unsigned agreement that Ramirez denied having any knowledge about. Thus, Atlantis was left with arguing that there was a verbal agreement that made Ramirez an independent contractor. Fortunately for Atlantis Lounge, it was able to present additional evidence supporting showing that Ramirez essentially paid for the opportunity to operate the Club as an independent contractor without interference from Atlantis Lounge, Inc. as to the day-to-day operations.
For this reason, the Court concluded that Ramirez was an independent contractor and not an employee. And this conclusion meant that Atlantis could not be liable for the actions of Ramirez.
Whether an individual is an “employee” or an “independent contractor” is critical when it comes to many employment law issues. For example and in addition to the above example, an important distinction between an “employee” and in “independent contractor
” is that under Michigan law and the Elliott Larsen Civil Rights Act and the Michigan Whistleblower Protection Act do not apply to independent contractors.
However, significant legal problems can and often arise when employers incorrectly label an individual’s employment status as “independent contractor” when they are in fact “employees” under the applicable law. The first step in avoiding this problem, starts with a solid understanding about the distinction between employees and independent contractors and then having in place a defensible independent contractor agreement that accurately reflects the relationship between the individual and business.
For more information about employment and independent contractor agreements, or compliance with federal or Michigan employment laws, contact employment attorney Jason Shinn.